Corporation of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints v. Associated Contractors, Inc.

• Decision Date: 20 July 1989
• Docket Number: No. 88-8466,LATTER-DAY,88-8466
• Citation: 877 F.2d 938
• Parties: CORPORATION OF THE PRESIDING BISHOP OF THE CHURCH OF JESUS CHRIST OFSAINTS, Plaintiff-Appellant, v. ASSOCIATED CONTRACTORS, INC., Russell E. Hoffman, Jimmy Beck, Alpha Professional Services, Inc., Defendants, Bituminous Casualty Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 938

877 F.2d 938

14 Fed.R.Serv.3d 450

CORPORATION OF THE PRESIDING BISHOP OF THE CHURCH OF JESUS CHRIST OF LATTER-DAY SAINTS, Plaintiff-Appellant, v. ASSOCIATED CONTRACTORS, INC., Russell E. Hoffman, Jimmy Beck, Alpha Professional Services, Inc., Defendants Bituminous Casualty Corporation, Defendant-Appellee.

No. 88-8466.

United States Court of Appeals Eleventh Circuit.

July 20, 1989.

Tyrus R. Atkinson, Atlanta, Ga., for plaintiff-appellant.

John C. Bach and Bovis, Kyle & Burch, Atlanta, Ga., for defendants-appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before KRAVITCH and COX, Circuit Judges, and MORGAN, Senior Circuit judge.

KRAVITCH, Circuit Judge:

A lawyer's duty under Rule 11 of the Federal Rules of Civil Procedure is at issue in this case. We conclude that the district court erroneously awarded Rule 11 sanctions against the plaintiff and its attorney; accordingly we reverse. ¹

I.

The Corporation of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints (the "Church") entered into a contract with Associated Contractors in February 1985 to repair the roof of a building on Harkers Island, North Carolina. On April 10, 1985, during the repair, a fire occurred which caused substantial damage to the building. This litigation arose from the Church's attempt to secure compensation for its loss.

Before the repair contract was signed, Associated Contractors was obligated to procure insurance on the project and provide a certificate evidencing the insurance to Building Consultant Services (BCS), the Church's local agent; prior to execution of the contract, Roger DeLisle (who along with his wife is a principal of BCS) assured Leo Findlay, the Church's regional manager, that the project was insured. After the fire, BCS forwarded to the Church a certificate of insurance dated March 10, 1985. The certificate--ostensibly drafted by Alpha Professional Services, a registered agent of the defendant Bituminous Casualty Corporation--recited that Associated Contractors was insured by "Bituminous Casualty Company." Associated Contractors' principals, Russell and Rosalind Hoffman, were also employees of Alpha.

BCS requested Associated Contractors to notify its insurance carrier, but no insurance adjuster arrived on Harkers Island. BCS and the Church mailed letters requesting action to Alpha and Bituminous, but neither Alpha nor Bituminous responded. Somewhat concerned, the Church hired Bruce Potts, a private arson investigator, to look into the matter of insurance.

Potts spoke with management employees at Associated Contractors, BCS and Alpha. Aware of a burgeoning problem with its insurance coverage, the Church retained attorney Tyrus Atkinson in April 1986 to represent it in connection with the Harkers Island loss. In September 1986 the Church commenced suit against Mr. Hoffman, Associated Contractors, Alpha, and Bituminous.

Bituminous filed an answer in which it denied liability to the Church. In March 1986, after conducting substantial discovery, Bituminous requested the Church voluntarily to dismiss the claims against it, threatening a Rule 11 motion for sanctions were dismissal not forthcoming. The Church responded in April, stating that it intended to proceed with the original complaint against Bituminous. Bituminous then moved to amend its answer and assert a Georgia-law counterclaim against the Church for frivolous litigation, and likewise alleged a Rule 11 violation. The Church immediately filed a motion to amend its complaint, seeking to change its allegations against Bituminous.

In June, the district court denied Bituminous's motion to amend its answer, and announced that it would hold a hearing to consider the Church's motion to amend. Following oral argument, the Church served a motion for voluntary dismissal of Bituminous. Bituminous refused to be dismissed, preferring to remain in the action to settle matters between itself and Mr. Hoffman, but moved for attorneys' fees and costs against the Church pursuant to Rule 11. The district court granted the Church's motion to dismiss Bituminous, stating that it would not consider Bituminous's motion for costs and fees until the Church was given an opportunity to respond to the Rule 11 allegation.

In its brief in support of Rule 11 sanctions, Bituminous argued that "[c]entral to the allegations of the ... Complaint is the premise that the Church had in its possession prior to the April 10, 1985 fire a Certificate of Insurance." Bituminous then devoted several pages to explaining why the Church knew or should have known that BCS, the Church's agent, did not have a certificate prior to the fire. Bituminous quotes Findlay's April 1987 deposition, in which he indicated that "possibly" within three or four months after the fire, he was aware that the insurance certificate had not been received prior to the fire. Bituminous also quotes a November 1986 affidavit of Roger DeLisle:

There is controversy over the cause of the fire and I found a local investigator, Bruce Potts, and he was hired by the Church. I have given Mr. Potts essentially the same information about the Certificate, in that I did not have a Certificate of Insurance when the job started and I did not realize that I did not have a Certificate until after the fire.

Concluded Bituminous: "the factual premise which was the only basis for naming Bituminous in the original Complaint--that is, that [the Church] had a Certificate of Insurance with Bituminous' name on it prior to the fire, is completely incorrect." ²

The Church responded explaining the basis for its allegations against Bituminous: The Church relied on Mr. Hoffman's oral misrepresentation that the project was insured as well as the receipt of the insurance certificate prior to the fire; even though subsequent discovery may have cast doubt on the proposition that the certificate was received prior to the fire, the substantive allegations against Bituminous still held under an agency theory of liability--Bituminous could be liable for the neglect of Alpha, which in turn could be liable for the tales of Hoffman, Alpha's agent. See Stillson v. Prudential Ins. Co. of America, 202 Ga. 79, 42 S.E.2d 121 (1947) (insurance company can be liable for the fraud of its agent). Further, noting that the certificate recited on its face that it was issued on March 10, 1985, the Church claimed that it was entitled to rely upon a Georgia statute to establish that the date was presumptively correct. ³

Oral argument on the Rule 11 motion was held in November 1987. In its subsequent order, the district court found a Rule 11 violation and granted Bituminous's motion for costs and fees. The court stated as follows:

At the time [Bituminous threatened a Rule 11 motion], the parties had conducted considerable discovery and all evidence at that point revealed that [the Church] did not have a certificate of insurance before the fire....

It would seem that a reasonable inquiry in a case such as this one would include a review of the certificate upon which the [Church] actually relied and an investigation concerning exactly when the document was received. Obviously such an investigation was not undertaken in this case....

A reasonable inquiry in this case by [the Church] should have included an examination of the certificate of insurance that [the Church] allegedly relied upon and an investigation into when the certificate was received by the [Church or its] representatives before the factual allegation that [the Church] relied upon the certificate of insurance received before the fire was included in the complaint. Although [the Church] contends that the reliance on a certificate received before the fire is insignificant to its claims against the defendants, the factual allegation that plaintiff had a certificate which it thought was valid underlies all the [Church's] allegations of fraud and conspiracy against defendant[s] Alpha [and Bituminous].

No. 1:86-cv-2055-WCO, mem. op. at 10-11 (N.D.Ga. Mar. 9, 1988) (emphasis in original). The court assessed Rule 11 sanctions jointly and severally against the Church and its counsel. The Church quickly served a motion for reconsideration, proffering affidavits of counsel, Potts, and Mr. DeLisle that showed the extent to which the provenance of the certificate had been investigated prior to filing the complaint. In a subsequent order the court acknowledged that a pre-filing investigation had occurred, but denied the Church's motion, finding that no reliance on any of the DeLisles' statements concerning the certificate was reasonable.

II.

In relevant part, Rule 11 requires the attorney who submits a pleading to certify that "to the best of [the attorney's] knowledge, information, and belief formed after reasonable inquiry [the pleading] is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law...." Fed.R.Civ.P. 11. "Under [Rule 11,] the district court must focus on what was reasonable for an attorney to believe at the time the pleadings were filed, not on what the court later finds to be the case." Threaf Properties v. Title Ins. Co. of Minnesota, 875 F.2d 831, 835 (11th Cir.1989).

In requesting Rule 11 sanctions, Bituminous argued that the Church did not have a reasonable basis for alleging that BCS had received a certificate of insurance prior to the fire. In its response the Church largely finessed the point, arguing that this factual question was of no great moment because the allegations against Bituminous would stand even if BCS received no certificate until after the fire. As noted above, however, the district court held that "the factual allegation that plaintiff had a certificate which it thought was valid underlies all the [Church's] allegations of fraud and conspiracy against defendant [Bituminous]."

Examining the face of the complaint only, the...